Metris eyes its credit risk management

Previously reported restrictions on the practices of non-prime credit card lenders are coming to fruition (See ASR 4/08/02). The Metris Companies signed an agreement last week with the Office of the Comptroller of the Currency (OCC) "to strengthen certain aspects of the safety and soundness of the bank's operations," the company stated in its most recent 8-K, filed last Wednesday with the Securities & Exchange Commission.

As part of the agreement Metris will complete a comprehensive evaluation of credit risk management in order to ensure that it maintains strict controls and establishes additional policies for the testing of new strategies for account acquisition, account management and collection. Also, Metris must complete a comprehensive evaluation of borrowers' ability to reduce debt and possible causes for increased debt.

Prompted by the admission that credit card balances topping $5,000 grew to 58% of managed receivables last year, the OCC mandated that Metris cut its maximum credit lines to $10,000 from $12,500, as well as less frequent credit line increases for cardholders.

Regulators also would like Metris to adopt three-year strategic plan and a thee-year capital plan as well as a contingency funding plan, as the OCC has made an explicit attempt to reduce Metris' reliance on insured deposits.

As part of this ongoing process, as well as the increasing refinement of underwriting models, Metris has been targeting slightly higher FICO scores, of roughly 680, versus the current average of 660, according to treasurer Ralph Than.

To monitor the situation Metris also must establish an oversight committee to report on the bank's compliance to these new guidelines to the board of directors. A credit policy committee will also be formed to oversee its adherence to a new credit policy.

Gimme Credit analyst Kathy Shanley, who has been following this situation for some time, notes that Metris claims there is no link between the agreement and its decision to cut its earnings guidance: "The increased supervision is likely to impinge on some of Metris' most profitable products."

And while Metris added that it would focus marketing efforts on a higher class of customer, Shanley notes that Providian has already demonstrated that it is "very difficult for a subprime specialist to move up-market."

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